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U.S.-China Trade as an Investment Opportunity

Wells Fargo Investment Institute - March 2019

Paul Christopher, CFA, Head of Global Market Strategy, explains the U.S.-China trade relationship in this month’s video.

Transcript: U.S.-China Trade as an Investment Opportunity

Title graphic: Why China is still an emerging economy

The basis for the U.S.-China trade relationship lies in how the two economies are complementary. China’s economy has developed rapidly and Chinese wages are growing – allowing Chinese consumers to afford a large and growing variety of consumer goods. Services in China today are underdeveloped but should develop over time. Chinese medical services are so poor that many affluent Chinese still go to Taiwan for medical care, even taking their families with them during long treatments. Environmental services are also immature, as China tackles years of accumulated industrial pollution.

Likewise, Chinese financial services – like expanded banking, insurance, and investment services - are still in their infancy. Finally, Chinese agriculture is very inefficient. Crop yields need to rise dramatically as urban centers in the eastern part of the country continue to grow and compete with farms for the available land.

Title graphic: Investment opportunities as China develops

To build out its service economy, China is likely to tap U.S. firms. U.S. industrial firms made important inroads into China 25 years ago, and we think that U.S. services firms could enjoy a new wave of investment opportunities in China.

China is no longer strictly the home of cheap, plastic toys and home electronics assembled from parts manufactured elsewhere. U.S. shoppers today can easily find high-tech Chinese products, built from synthetic materials developed by Chinese scientists. Even so, the level of Chinese wages is likely to remain lower than U.S. wages, meaning that U.S. consumers should continue to enjoy lower prices for Chinese goods than for goods made in other parts of the world.

Title graphic: Competitive tensions growing

The challenge for both countries is their increasing economic and even geopolitical competition. China’s government wants to become a leader in new technologies by 2025 and is already competitive with many U.S. industrial leaders. And China has expressed a goal to be the dominant military and political power in East Asia.

The tariffs that both countries recently raised on each other reflect the tensions arising from their growing economic, political, and military competition. That competition is unlikely to abate but may evolve through long-term negotiations in trade, intellectual property protection, and diplomacy in the region.

From an investment perspective, we prefer not to take international risks in single countries. Fortunately, the growing economic ties between China and its neighbors create a potentially rewarding opportunity more broadly in Asia. We believe that exposure to emerging Asia should be an essential part of any portfolio with a growth objective.

Risk Considerations

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